Investing in real estate
Real estate covers a whole range of assets that are linked in some way to land. It could be an apartment, a vacation home, a condominium, vacant land, a studio apartment, an independent house, a villa, a farm, a commercial complex, a commercial unit, an office complex, a shopping complex, or a unit in such shopping complex .
Why do people purchase real estate ? .
Primary objective .
Normally people purchase homes to live in them. This helps them in saving monthly rents, which escalate over a period. By purchasing a house, people succeed in striking down one inflationary item from their budget. The other advantage is that they need not cower down to the whims and wishes of the house owner. If they want their house painted in bright colors, they can do so, without having to explain their likings to another individual.
Similarly, farmers purchase lands to cultivate crops, businessmen buy shops to sell their goods, companies buy office units to set up their offices. By owning a farm, the farmer avoids annual rental charges on farms. By owning a shop, businessman avoids rentals on shop. Companies avoid rentals on office premises by owning the offices.
Secondary objective
The demand for real estate is ever increasing in India as well as other parts of the world because of increase in population, which is not supported by corresponding increase in land. This has led to spurt in prices of real estate properties across the globe.
Such spurt in prices of properties has also resulted in hike of rentals and leasing charges. This has made real estate an attractive investment option. In addition to regular rentals and lease charges, the investor also views the capital appreciation prospects of the real estate.
Some investors in unorganized sectors invest in real estate as a retirement planning method. Their logic is that increase in rentals will offset the inflation, and rentals will supplement their incomes from other investments. .
Proximity to infrastructures like commutation facilities, employment facilities, educational facilities, etc., increase the demand for real estate. This, however, does not mean that real estate properties that are far away from such hustle bustle will not fetch value. Such properties, if located in scenic surroundings, would be favored by rich people. .
Real estate properties in tier one cities are already fully priced. Moreover, the existing developments cannot be erased to bring it in tune with contemporary developments. .
Therefore, appreciation may be limited. However, investors can consider investing in tier two cities that are coming up. It is also easier for developers and investors to redo these properties as they are cheaper. .
Advantages of investing in real estate are : .
- Unlike cash, gold, and other liquid assets, it is not easy to steal real estate.
- Real estate increases in value over a long period of time. So holding on to it, whether for personal use, or for speculation makes sense.
- It is generally not an idle asset, like gold or other bullion. It earns its weight through rentals, and leasing.
- Probability of real estate prices sliding is far lower than probability of these prices rising.
- It can be mortgaged to raise some amounts for emergencies, or other personal requirements.
- Bankers and financial institutions offer loans for acquisition of residential real estate and even commercial real estate. Interests paid on these loans are deductible from taxable incomes. Even the principal component that is repaid every year on housing loans is deductible from taxable income subject to a ceiling.
- Because bankers and financial institutions offer housing loans, acquisition of real estate becomes easy. These loans are repayable over a long period in equated monthly installments, which make them affordable. If the amounts that are paid over the long tenure of the loan are discounted at inflation rate, the amount paid towards interest on these loans would seem negligible.
- Some real estate properties, like independent houses, can be modified at a later date, by addition of a floor or developing it into a residential complex. By doing so, the owner gets an additional source of income.
- Periodic capital appreciation does not entail periodic taxes. Capital gains taxes are payable only when the asset is sold. Therefore, even though a person holds a property of a very high value, he or she may not be liable to any taxes till liquidation of the asset.
- apital gains tax allows for indexation of asset. This has the effect of reducing some tax. Capital gains can also be rolled over into another residential real estate asset, thereby, negating any tax that may be payable on capital appreciation.
- If the investor had chosen to retain cash instead of investing it in real estate, he or she would have earned interest income on such liquid asset. Such income would be immediately taxed.
- In India, there are no capital gains taxes related to sale of agricultural lands.
- Some investors opt to invest in real estate for rentals that beat inflation. Thus, it can be a nice way to supplement retirement income.
Disadvantages are: .
- It is an illiquid asset. That is, it cannot be sold very easily like gold or shares. The owner has to wait for the right customer to come and pay its price. Therefore, at times, the anticipated price may not be received because of time constraints.
- Because the value involved is large, it can become a source of dispute amongst family members.
- If the title is not verified properly, or compliance with regulations is not ascertained, the purchaser may have to absorb losses.
- The governments retain rights to acquire some lands for the good of general public. Under such circumstances, the owner may have to surrender the property for a value that government fixes. Generally, this value is much below the market rate of the property.
- Unscrupulous realtors also manage to sell properties that are likely to be demolished or taken over by the government.
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